Wednesday, June 29, 2016

Bits of coin and pieces of eight

Will past and future money dance on the grave of the present?

My father was a gold miner. I spent some time underground as an onsetter; my younger brother worked at the Chamber of Mines, and my older brother, Berend, was a “shift-boss” for a number of years. Apart from sharing his mine-official internship with Roger Kebble, Berend in his Blog, the Golden Thread has captured some fascinating and valuable historical anecdotes of mining turbulence in the 60’s and 70’s. It was as if we were all drawn to gold exploration and mining; understanding and fascinated by its ancient allure in many things, but primarily in its then still unassailable position as the ultimate store of value and supremacy over paper money.

So it is with some bemusement that I have been following the mining of another unit of value – BitCoin. What? No headgear? No kilometres-deep shafts; no incline shafts, tunnels and ore-passes? No “ngolovans”, “hoppers”, “giraffes”, locos, skips and cages? No miners, rock-drillers, blasters, surveyors, riggers, and “skippies”? No man made mountains of rock, slime dams and sinkholes? No surrounding towns, hostels, compounds and warrior-like camaraderie both underground and in dingy pubs and shebeens?

None of that stuff! You can create this unit of value by “simply” sitting at a computer and cracking a code. The inverted commas confirm the idiom that simple things are not always easy. It has become increasingly difficult, and demanding massive processing power. This is captured in an explanation on a leading crypto currency website, CoinDesk which says: “In traditional fiat money systems, governments simply print more money when they need to. But in BitCoin, money isn’t printed at all – it is discovered. Computers around the world ‘mine’ for coins by competing with each other.”

The term “mining for BitCoin” is therefore no co-incidence. Like gold, it has to be discovered and exploited through massive effort and resources: just in a very different form. In comparing the two as a unit of value and potential means of exchange, it invokes a computer game image of Blackbeard with a gold-plated sword doing battle with Darth Vader with a lightsaber.

So now we have three potential forms of money, each with their own element of fiction. If you strip gold of its ancient allure, its historic backing of paper currencies and its investment and adornment image, you could certainly posit the Keynes view that it is a “barbarous relic”. If you interrogate BitCoin’s mysterious and anonymous founding, creation structure and block chain security, you could equally have some qualms. But both do not come near the degree of fiction that permeates Fiat currencies. Debt is a fiction. It is nothing more than a promise to pay sometime in an ever-delayed future -- a very empty promise considering the increasing extent to which the gap between debt creation and the means to pay is beyond redemption.

As fellow columnist, Magnus Heystek has mooted, many believe it must perish. The only question is which will survive and will there indeed be a battle between Blackbeard and Vader over the corpse? Blackbeard seems to be stirring under tons of derivative froth, with some believing he may emerge as early as this year. And Vader’s sabre light has grown brighter with mineable BitCoin reserves being halved.

Perhaps they won’t square off against each other. Perhaps they will join forces to replace the deceased. I understand Blackbeard pretty well, but I must confess that I am still a novice at understanding Vader.

I am of the generation that bridged the age of deprivation and the age of abundance. It was a bridge that by its very nature implied some fundamental shifts in socio-economic constructs. Few of those momentous shifts have been more profound than the rapid pace of technology. It’s a concern shared by many, albeit in no small number by those frustrated with the latest smart-phone – only to be disdainfully helped by a 12 year old. But there are many too who have deeper concerns – about losing their jobs to some machine; or having their academic achievements made redundant by apps and algorithms. It has even disturbed the vestiges of policy makers, economists and advisors, facing disruption of conventional metrics that either inform, or ill-inform their decisions.

In its most significant feature of all, we should not fear technology but rather the stifling of it. And that is in block-chain technology that is wielding a lightsaber into the parasitic fat which is smothering value-creation. The scalpel has three shapes:
·       promising to restore integrity to the global means of exchange;
·       spawning new companies with very different organisational structures than their typical equity based counterparts and
·       New methods of funding enterprise.

In the first, we may still be a long way from BitCoin or other crypto currencies becoming a real threat to Fiat currencies, but even a casual follower of topical events will be aware that our debt driven means of exchange is simply unsustainable. In that contest, crypto currencies have to firmly establish their integrity in facing an establishment onslaught. Despite the latest DAO hacking crisis, BitCoin itself is gradually overcoming suspicions around its mysterious formation and while it cannot be blamed for how villains use it, abuse will simply add weight to detractor arguments, especially from vested financial services.

The second – the growth of so-called “insurgent”, or “disruptor” company models holds even greater promise. They take us back to ancient principles of value creation which is that cell I spoke of in this Moneyweb article.

The third – that of crowd-funding is perhaps the most exciting of all. It is still very early days, but last year alone, it raised nearly $35 billion dollars, a near 6-fold increase in three years. It is challenging conventional equity markets and is certainly a threat to venture capital.

The three together are mutually supportive and represent a formidable force that give a whisper of a different, more equitable, more credible, and more values-driven tomorrow. Of course, they can fall (and have already fallen) prey to the same speculators, predators, mercenaries and villains that have savaged the global economy and whose actions encouraged the birth of these alternatives in the first place.

Their future depends on their integrity. That cannot be cemented and maintained by doing more of the same.

Thursday, June 16, 2016

Changing the conversation

If we want growth, we have to start talking growth.

The latest dismal GDP figure has certainly been something of a shocker. But have you noticed when you have a group of people lamenting their plight, how the mood changes when you get them to focus on doing something about it?

The reason is simple and has been captured in life lessons over the ages, including scripture and regular inspirational dictums before and after Peale, Ziglar, Covey, and Robbins. The truth is that we are more in control of what we give than what we get; of the contribution than of the reward. And if you want to live a life of agitation and disturbance, then focus mostly on reward.

One of the most puzzling things about economics is the inordinate, perhaps even exclusive emphasis placed on reward. None is more revealing than the way we account for the performance of enterprises – and then even only in the most narrow outcome of profit. That sets off a scramble by other role-players for maximum extraction, rather than contribution. Being the individual cell of the entire economic body, enterprise sets the tone for all economic behaviour at an individual and institutional level and makes Finance Minister, Pravin Gordhan’s call for unity against adversity difficult to achieve.

For many decades, this behaviour has been chipping away at economic wellbeing, the symptoms of which are too many to cover here, but the most profound and significant is the shift in behaviour from aspirations to expectations, to the point of entitlement. The destructive effects of a narrow, inward and reward focused enterprise environment have seen the creation in recent decades of a plethora of counter measures aimed at ensuring good governance and sustainability. But all have missed an essential truth: the need to shift the strategic focus from reward to contribution. This can be achieved with one simple act: moving the key metric from profit to wealth creation, or value added. Value-added measures contribution. Profit is part of distribution. Value-added measures giving. Profit measures getting.

It was this thought that has led to the compilation of what I have called the Contribution Account©.

 Let me say at the outset that I am not an accountant, and this is not a new accounting format, rather an operational process that guides behaviour towards maximum wealth creation and optimum distribution; towards contribution rather than reward, and most importantly towards growth rather than containment. It was the culmination of much intense discussion with many role-players in my consulting days, including accountants, senior executives, and organised labour representatives.

It was originally based on the value added statement, and subsequently the cash value-added which moves depreciation and amortisation from “providers of capital” in wealth distribution to outside suppliers. Earlier, in an article in the prestigious accountant’s mouthpiece, Accountancy S.A., I argued for the same thing to be done to interest. Both of these arguments have been detailed in previous articles and in my e-book: Common Purpose; Common Fate.

I think it could be taken a step further, by moving personal income tax from the employee section to the “state” row, which currently reflects only company tax and corporate social responsibility expenses. (My adjustment as well). There are many difficulties in accurately reflecting this amount for each company, but working on an average of 18% of personal income, the employee share of wealth creation would drop to 45% and the state’s share increase to 25%. This excludes the indirect taxes such as VAT and duties. It also excludes local government taxes on individuals.

The Contribution Account is captured in the middle column of the illustration, and the 5 strategic pillars of maximum wealth creation and optimum distribution in the immediate left and right columns respectively. These can be exploded further into operational metrics shown in the outer columns and further still to reveal the magnificent tapestry that makes up the essence of wealth creation. Note how the standard accounts and shareholder metrics are captured as part of distribution: supporting an essential truth – all benefits accrue from wealth creation itself; from contribution before reward; from giving before getting.

I have sung the praises of this approach so many times in previous columns that they need not repeating. But even a superficial glance at the essence reflects simplicity, palatability, and far greater transparency than standard accounts do. And it is becoming far more relevant in a sluggish economic growth environment.

In one swoop, one captures most of what the prescriptions, regulations and volumes of new accounting requirements try to achieve: transparency, sustainability, sound governance, ethics and greater stakeholder focus. These are underpinned by all of the King Reports. But none of these measures challenge the supremacy, pervasiveness and inexorable drivers that are entrenched by the standard accounts. Indeed, in most cases they are seen to be a burden to them. The contribution approach is virtually guaranteed to shift the emphasis away from reluctant compliance to passionate common conviction; from restraint to growth and to role-player solidarity.

Attention and intention are circular and inextricably linked. If we need economic growth and greater stakeholder cohesion, then there is no better way of achieving it than reflection in the way we measure it.